According to the static theory, the optimal level of debt Blank______ the WACC.Multiple choice question.minimizesequalsmaximizes

Breakdown the Problem

1. Identify the key terms in the question: static theory, optimal level of debt, WACC (Weighted Average Cost of Capital).
2. Understand the relationship between debt and WACC according to static theory.

Relevant Concepts

3. According to the static theory of capital structure, as firms increase debt, their WACC typically decreases up to a certain point due to the tax shield benefits of debt.

Analysis and Detail

4. The static theory posits that there is an optimal level of debt where the cost of debt balances with the cost of equity, minimizing the overall WACC. Beyond this point, additional debt leads to increased risk and potentially higher costs, which may increase WACC.

Verify and Summarize

5. From the static theory, it can be concluded that the optimal level of debt minimizes the WACC.

Final Answer

The optimal level of debt minimizes the WACC.